For two decades, the consumer products industry has watched its total shareholder returns (TSRs) steadily drop from one of the highest to one of the lowest among industries. Reversing that fate requires companies to be aggressive about boosting volume growth and restoring profitability.

For many in consumer products, the year 2024 was a time to evaluate portfolios and shed underperforming, noncore, and low-growth assets to double down on the areas with the highest growth potential and to simplify for profitability. It’s been a steady trend. Even as overall deal value dropped after 2018, divestitures' share of total M&A increased by 10 percentage points (see Figure 1). When we asked M&A practitioners in consumer products about their plans for the future, about 60% said that they expect to sell assets within the next three years compared with 42% across all industries.

Figure 1

It is no surprise that divestitures were on M&A practitioners’ minds in 2024. The consumer products industry already is more consolidated than most, and it faced the same macroeconomic headwinds as other industries, such as high interest rates and regulatory scrutiny that discouraged acquisitions. On top of that, consumer products companies find themselves burdened with two types of investments, including those for digital capabilities that they’ve delayed for too long as well as for more resilient supply chains.

All of this led to a 19% decline in M&A deal value in 2024 compared to 2023. That’s a long way from the industry’s heady M&A years in the 2010s. In fact, the only 2024 consumer products deal valuation greater than $10 billion announced during the first 10 months of 2024 was the Mars acquisition of Kellanova, which was the remaining core of Kellogg’s after spinning off WK Kellogg, its North American ready-to-eat cereal business, a year prior.

But the divestiture activity is another story because in addition to supply, there is adequate demand. As companies prune their portfolios, they’re willing to selectively invest in other high-growth areas that are big enough to make a difference yet small enough to pull off. When we polled M&A executives in consumer products, 30% said that they expect increased interest among corporate buyers for carve-outs over the next 12 months—and around 40% of them anticipate more private equity interest.

When breaking up is the answer

Consumer products companies are separating to unleash growth by providing more focus and simpler business models. The most dramatic examples can be seen in consumer healthcare, in which splitting the consumer element from pharma has redefined the industry. In 2022, GSK spun off its consumer health business into Haleon. A year later, Johnson & Johnson did the same thing with its consumer health business, creating Kenvue.

Further separations do not feel far away, which, in turn, may give rise to industry consolidation and maturity in a fragmented market. Fonterra just announced the separation of its consumer business, for example.

Companies are also separating as a way of exiting the low-growth parts of their portfolios that have become a drag on the rest of the business—and where there are likely better parents. Since 2015, Unilever has systematically divested businesses to reduce its exposure in frozen goods, teas, and margarine and other spreads. In 2024, the company extended that to ice cream. Companies such as Reckitt are following suit, with announced plans to sell its Essential Home business next year, which includes brands such as Air Wick, Calgon, and Cillit Bang.

As part of this shift, we’re seeing more creative divestiture structures, which is not surprising given the continuing valuation gap between buyers and sellers over price. Surveyed consumer products M&A practitioners told us that the top three most important factors in deciding to divest are stakeholder support, tax implications, and availability of buyers (see Figure 2). In this climate, tax-free spin-offs or reverse Morris trusts appeal to certain sellers, and divesting to a joint venture is also an appealing option because it allows for participation in upside while gaining new investment in the business.

Figure 2

Getting it right

Divestitures aren’t easy.

For one thing, boards and managements are focused on other pressing issues, such as transforming supply chains for better resiliency or implementing enterprise resource planning software. Just obtaining board approval for a divestiture requires thoughtful planning and coordinating with other priorities.

Getting the value out of a divestiture requires running a program that is carefully tailored to the separation thesis. The best companies balance speed, base business performance, and value creation. And sometimes there’s the need to move quickly because delays create a negative spiral for the business—less focus and demoralized talent results in worse performance and therefore reduces the value. For others, there’s a need to package the business by pulling quick-win levers that will help attract buyers or investors and deliver on the equity story.

In consumer products, divestitures typically take 12 to 36 months from inception to close. They test executives’ decision-making abilities on everything from designing the appropriate asset perimeter and working through transition service agreements (TSAs) to managing talent in the interim. And ultimately, these deals often don’t succeed. In fact, our analysis shows that only the top quartile of spin-offs delivered combined TSRs above the overall market’s performance within the three years following the divestiture (see the Bain infographic “When a Spin-Off Wins Big”).

What can divestors do to boost their odds of success? We see five key steps to take for consumer products executives planning to divest.

Step No. 1: Start with a holistic view of your portfolio, and mark businesses for exit in line with your strategy. There are some basic questions to ask: Are there still parenting advantages you have over the business? Where are there shared customers and capabilities? What is the sum-of-the-parts analysis, and where are investors discounting the business? Consumer products companies can take a hard look at what categories fit better or those that are too different, and consider options such as different buyers, different aisles, and even different cost profiles as they evaluate their portfolios.

Step No. 2: Aim to maximize value through the perimeter and transaction structure; do not just split the business. Think through how to bundle brands to spur volume growth and streamline costs. Also, think through what structure will maximize value. For organically grown businesses, tax-free spin-offs can minimize tax leakage of deal proceeds. For partial businesses or businesses requiring a turnaround, however, divestiture is often faster and requires a lower one-time cost to execute. Consider the need for cash and how proceeds will be reinvested—for example, through M&A, buybacks, or debt paydown. And think through what an attractive asset perimeter is for an acquirer.

Step No. 3: Accelerate decisions on the biggest entanglements. In 2021, we asked practitioners to name the top inhibiting factors for divestitures. Functional entanglement was No. 1. For consumer products companies, the biggest entanglements often are around systems, shared production, and route to market. Thinking through how to disentangle the business in a way that minimizes stranded costs and one-time costs can be a complex equation.

Step No. 4: Use the unfreezing moment to reshape the remaining company’s profit-and-loss statement. A divestiture or spin-off is an opportunity to reshape the profit-and-loss statements (P&Ls) of both the divested company and remaining company. Building the pro forma P&L and disentangling the businesses will often expose stranded costs and bloated cost structures in the remaining company. Even for businesses that are already largely separate, there can be an opportunity to shift investments to areas that line up with the remaining company’s new focus.

Step No. 5: Keep 95% of people 100% focused on the base business. As with any transaction, running a divestiture can distract from the base business. When that business suffers, the economics of a deal sometimes becomes less attractive or even untenable, and buyers may back out or spin-offs may be canceled. The best consumer products companies keep a focus on the base business by running a divestiture program with fewer, more highly dedicated individuals.

What if you’re the buyer?

Among surveyed consumer products M&A practitioners who have bought a carve-out within the past three years, 70% say that their last carve-out acquisition created value. But even for experienced acquirers, these deals can pose risks. Here’s our advice for buyers.

Figure out what you're getting. Use cutting-edge diligence to assess and proactively address carve-out standing issues. In a carve-out acquisition, it is not always immediately clear what you’re getting. In fact, “issues with the perimeter” was one of the top three carve-out challenges cited by consumer products M&A practitioners in our survey (see Figure 3). Diligence is the critical moment to dig deep into the people, systems, and assets (including brands and IP) that tell you where the new company will either need TSAs or a build-out/integration plan for Day 1.

Figure 3

Develop an investment thesis. As with any M&A in any industry, the deal thesis is critical. With a carve-out in consumer products, there are likely specific levers that need to be pulled to increase growth, profitability, or both. Understanding these levers early on will help with carve-out diligence and integration planning.

Remember, carve-out integrations are more complex than normal integrations. For practitioners with a repeatable integration capability, there are challenges to running a carve-out integration. The main difference is that Day 1 will be a hard cutover. This often means a heavier lift in sign-to-close planning to ensure readiness on Day 1. Two other considerations are TSAs and dis-synergies. The bandwidth required to get these correct should be considered when setting up a program.

Plan for and execute Day 1 in a way that mitigates risk and prepares for the future state. Because carve-outs are so complex, many companies see a successful Day 1 as the mark of victory. But the best carve-out acquirers understand that a smooth cutover on Day 1 is just the beginning. These companies plan for a Day 1 that enables future value creation. For example, one acquirer understood that procurement was a critical lever in its value creation plan, but there was only one procurement full-time equivalent coming onboard within the perimeter of the carve-out. With this knowledge, the acquirer moved quickly to hire a top procurement executive who could start planning for Day 1 and beyond.